Zoning Laws, the Housing Market and the Ripple Effect

Mr. Leef is a recent graduate of the Duke University School of Law, Durham, North Carolina.

Henry Hazlitt has called economics a science of recognizing secondary consequences. What he and others who have taken the time to study the working of free markets have perceived is that there is a natural orderliness in uncoerced dealings between men which tends to maximize the well-being of each individual and put resources to their best use. But to accomplish this, a market must be free, which means that each participant must be allowed to decide for himself how he will use his assets, whether personal skills, money, or physical property. Whenever government compels a person to use his property in a way other than he would freely have chosen, this natural orderliness is upset.

The effect of any such tampering with a market may be likened to throwing a stone into a calm pool. Waves of disturbance will ripple outward. Unfortunately, government will now look upon these ripples as new problems calling for its false remedies, and throw more stones in an attempt to neutralize the unwanted and unforeseen consequences of its earlier stone-throwing. I call this the ripple effect; it is nothing other than a failure to foresee secondary consequences.

This article is about one form of governmental interference with free markets which nicely illustrates the ripple effect. It is about zoning ordinances, particularly those which regulate the type of housing a person may build on his property. Such ordinances demonstrably have worsened the housing situation in this country, have been a vehicle for much manipulation, unfairness and favoritism, and, of course, have spawned new coercive remedies designed to set aright the problems zoning has caused. What government cannot see is that these "remedies" will even further impair the functioning of the housing market.

A Primer on Zoning

A zoning ordinance is a decree by government that land in its jurisdiction may be used only in accordance with its regulations. These regulations are contained in a zoning map, which designates the permissible uses for property in each zone. For example, a subdivision might be zoned to permit only single-family dwellings on lots of one acre or more.

The original rationale behind zoning was that it was necessary to prevent nuisances. City governments thought it desirable that industry and retail trade be segregated lest their attendant smoke, noise, and traffic impose costs on residential areas. The paradigm case zoning was aimed.at would be the construction of a steel mill on a quiet, shady street. Zoning based upon this argument was upheld by the Supreme Court even though its adoption might cause an enormous loss to the owner of affected property. 1

Zoning, however, was not limited to the segregation of industrial from residential areas. It was also used to demarcate the boundaries for single-and multi-family housing. When challenged in court, cities argued that allowing apartment buildings to be constructed next to single-family houses would shut off air and light to the latter, increase noise and traffic, and deprive children of places to play. Lurking behind these doubtful arguments (which the Supreme Court also accepted as justifying zoning of this nature) was the objective of protecting the property values of homeowners against the decline which would follow if their area became less exclusive. It will be observed that this concern has nothing to do with true nuisances such as pollution and noise, but rather is an attempt to use the coercive power of government to protect against those losses which free markets must necessarily sometimes inflict.

The Law of Nuisance

The common law had long recognized actions for nuisance when zoning first became popular. This action was based upon the idea, inseparable from the argument for freedom, that one does not have a right to make use of his property in such a way as to injure or render less fit for use the property of another. If one did so, he might be compelled by a court to pay for the extent of his damage, and the destructive use might also be enjoined.

Now, it cannot be said that nuisance suits ever became a perfect solution to the problem of externalities (the imposition of costs by one landowner upon his neighbors). Legal actions have high transaction costs, and success is never a sure thing. And if the losses were spread over a large number of people—e.g., smoke damage from a steel mill—almost certainly no one of them would feel sufficiently aggrieved to undertake the expense of a lawsuit (at least prior to the advent of the class action). These factors served to deter many from asserting their legal rights.

All this may be admitted without indicting nuisance law for any inherent flaw. Courts and legislatures could have devised new procedures fairer to plaintiffs and new remedies for accommodating competing interests had they seen the necessity to do so. Nuisance law, however, has suffered from extreme neglect during the nation’s half-century infatuation with zoning. Even so, there have been noteworthy nuisance cases in the last few years, indicating that zoning is not the only answer to the externalities problem.2

Zoning vs. Nuisance Law

It is important to compare the way in which zoning and nuisance law operate. Nuisance law is based on the market idea that one should pay for the costs that he causes to be incurred, and works punitively—at least until people come to know what uses will probably cause them to have to pay penalties. At that point, uses for which the expected costs are too high will be deterred. Thus, nuisance law should—or could—lead to the same sort of economic calculation which underlies any business decision. An entrepreneur would decide against building a steel mill in a residential area for the same reason he would decide against building one where it was difficult to get raw materials—the costs Would be too high. On the other hand, a contemplated use of land, a grocery store, for instance, might impose small costs on the neighboring owners, but still be a worthwhile project because of large expected returns. It is this sort of rational economic calculation which optimizes the use of resources. Zoning, however, does not allow individual decisions as to the costs and benefits of the uses of land. While zoning may prevent some nuisances3, it lacks the ability to discriminate between nuisances which are worth their cost and those which are not, and prohibits some land uses which would not be nuisances at all. This is so because zoning is not predicated upon a calculation of costs and benefits, but only upon a planning "expert’s" notion of how cities ought to be patterned. With zoning, we pay a high cost in efficiency to prevent an unknown but probably small number of nuisances. The planners cannot know how much land will be demanded for each possible use at the time they draw up the zoning map; too much may be allocated to light industry, or too little to multifamily dwellings. As a result, we have waste and inefficiency.4

"Exclusionary" Zoning

Now we meet the villain of the piece. After the courts gave the green light to zoning, people quickly realized what a powerful tool they had been given. All manner of restrictions might be put on the use of land which would guarantee that "undesirable types" would have to live somewhere else. Municipalities frequently enacted ordinances requiring a minimum lot size of an acre or more; often there was no provision for apartment houses and mobile homes, while in some cases they were even affirmatively excluded. Various rationales were advanced to justify these interferences with freedom, but none more than tenuously linked to any proper governmental function of protecting health or safety, or preventing nuisances. At the bottom was always the desire to exclude people of lesser income from the community.

It was in the mid-sixties that the people who are usually so fond of government planning and who enthusiastically support zoning as long as it is "only" commercial interests which are affected, realized that they had created a

monster. The shoe was on the other foot now—one of their favored groups, the poor, was being victimized by zoning. The result was a large number of courtroom battles over the legality of what was called "exclusionary" zoning. (All zoning is exclusionary, but never mind.)

The Legal Outcome

In several cases, courts struck down large minimum lot size ordinances. Those who believe in freedom can applaud such decisions; if a group desires to insulate itself from the rest of society, it may do so by purchasing enough land to achieve that objective, but it is wrong to do so through the use of the coercive power of government. Unfortunately, not all courts and legislative bodies were content with a mere restoration of freedom. Instead, they sought to rectify the problems created by zoning by imposing even more zoning.

The leading case, Southern Burlington County NAACP v. Township of Mt. Laurel, comes to us from the Supreme Court of New Jersey.5 In ringing language, the court invalidated the town’s highly restrictive zoning scheme, and then intoned that every developing community has an obligation:

Affirmatively to plan and provide, by its land use regulations, the reasonable opportunity for an appropriate variety and choice of housing, including, of course, low and moderate cost housing, to meet the needs, desires and resources of all categories of people who may desire to live within its boundaries.

The animating force behind the court’s ruling was not a belief in liberty, but rather a simple-minded mathematical notion that each municipality should contain its "fair share" of low- and middle-income residents.

This idea that people should be distributed throughout society in accordance with precise ratios shows forth even more disturbingly in the so-called "inclusionary" zoning ordinance. The concept, which has found some support in academic journals6, is to require a developer to include a specific percentage of units for low-income families if he is to be allowed to construct any multifamily project. Such an ordinance was enacted in Fairfax County, Virginia, but was held unconstitutional by the Supreme Court of Virginia.’

Making the Problem Worse

Both the Mt. Laurel "fair share" requirement and the "inclusionary" ordinance recognize that zoning has

been used to limit the number of places where poor people might live, and seek to remedy the shortage of housing which has resulted. But at best they will be ineffective, and will probably succeed in making the problem worse.

New housing is seldom constructed expressly for the poor. (One exception, of course, is the federal government, but its efforts, such as the famed Pruitt-Igoe project, have been smashing failures.) Rather, the poor benefit from the filtering down of older housing left empty as wealthier individuals move into new or better homes. Careful empirical studies have demonstrated that this intuitively appealing proposition is true.8 Therefore, to the extent that "inclusionary" ordinances or judicially mandated "fair share" plans operate to decrease the total amount of housing which is constructed, they will work against the poor by diminishing the filtering down of older housing.

There are a number of reasons to believe that these legal mandates will, in fact, lead to less housing construction. Consider first the likely eventuality that, under a "fair share" requirement, an incorrect amount of land would be zoned for low-cost housing—i.e., more or less than would be so used in an unhampered market. This must be considered likely because a developing community cannot know what sort of commerce will choose to locate in it, and hence the characteristics of the workforce which may desire to live there will also be unknown. Merely because there is a heavy-industry zone, for instance, there will be no reason to assume that some specific percentage of poor people will be employed. The skill and income level of the workforce will vary greatly depending on whether labor or capital intensive industries move in. Thus, the planner’s guess will probably be wrong when he zones for housing. If too much land is allocated for one type of housing, too little must be for other types. Some land will be inefficiently used, total construction will be less than we would have had in the absence of zoning, and fewer old homes will become available to the poor.

Discouraging Developers

Secondly, we must consider the attitudes of the would-be developers ordered by an "inclusionary" ordinance to use a part of their property for the construction of low-cost housing. They may be reluctant to undertake the project thus presented for any of several reasons. With the mandatory low-income units, the overall rate of return may not be sufficient to induce the builder to devote his resources to this development as opposed to one where he finds no government interference. Or, the developer may have doubts about the marketability of the non-low-income units if compelled to put them in close proximity to those built for the poor. A related concern might be the possibility of high maintenance costs for the low-income units. Reflection upon the way property frequently is treated in the inner city might well dissuade one from building with the poor in mind as tenants. Yet another obstacle might be the architectural difficulties of integrating the smaller low-income units in the same structure with larger apartments designed for the affluent.

Thirdly, many of the reasons which might make the developer hesitant would also be on the minds of prospective lenders. Even if the former were willing, the latter might not be. The result: housing construction foregone.

Two more arguments tell against these schemes to provide better housing for the poor. So far we have left out the intended beneficiaries of this new housing, the poor themselves. Are many of them likely to be interested? Professor Banfield has pointed out that the inner-city dweller is accustomed to the nature of life there, and probably would feel bored and uncomfortable if transported out to suburbia.9 The spaciousness and solitude would be entirely alien, and the preferred entertainments and companionship would be far removed. In short, there is reason to doubt that there would be enough takers for this housing to fill the government’s quotas, leading to further waste.

Lastly, it must be emphasized that low-income housing is quite infeasible without government subsidies. The Mt. Laurel court expressly noted this. Do we really want the availability of housing for the poor to depend upon the caprices of federal and state budgeting? The government is anything but a trustworthy provider. A change in administration or voter sentiment could halt building in progress and prevent new construction from being undertaken, again to the detriment of the poor. Uncertainty is one of the prices one pays for government dependence.

No doubt there are more arguments, and perhaps more persuasive ones which could be advanced against these plans. All I have attempted to accomplish in this brief space is to show that the government did not, and indeed cannot, take into consideration all of the reactions one might expect to its tampering with the housing market. Not enough housing for the poor? Why then just zone for more, or compel people to build more, says the government. This simpleminded solution pays no heed to secondary consequences, and forgets that people have minds and wills of their own. That is why it will fail.


The adoption of zoning as a means of preventing external costs was ill-considered in the first instance. It led to inefficient use of land and at the same time caused many individuals to suffer great unfairness. Once this authoritarian power to restrict the uses to which a property owner could devote his land was acknowledged as legitimate, it followed inexorably that it would be misused to protect well-placed interests and exclude poor people from developing communities. In attempting to solve this government-created problem in the housing market, courts and legislatures have resorted to more of the statist medicine of coercion. "Inclusionary" zoning and "fair share" plans will not make more housing available to the poor, and will probably have the opposite effect. Then, we may confidently predict, government will react with yet more counterproductive laws and directives.

The radical solution to the chaos zoning has brought to land markets is to eliminate it. To be sure, people then will erect some buildings and do other things with their property that others will not like. If those uses actually interfere with the enjoyment of property by others, those people affected should be encouraged to sue in nuisance to obtain compensation for the damage done. If the offending use does not amount to a true nuisance—an apartment with poor people as tenants, or a building painted an ugly color—that is something people who live in a free society will just have to tolerate as one of the annoyances of life. The alternative to a regime of freedom in land use is zoning with its ever-present potential for waste and inefficiency, inequity and manipulation. Let us choose freedom.


‘ Village of Euclid v. Ambler Realty, 272 U.S. 365 (1926). The value of Ambler Realty’s holding fell by $300,000 when its tract was put in a residential zone.

²See, e.g., Boomer v. Atlantic Cement Co., 287 N.Y.S.2d 112. The court there refused to enjoin the operations of a cement plant, but awarded the plaintiffs the amount by which their property had been permanently damaged (based on market value) plus an amount equal to the ongoing monthly costs the plant imposed on them.

³It is not clear that cities would look much different in the absence of zoning. Professor Siegan points out in his book Land Use Without Zoning that Houston has no zoning, yet the market has neatly segregated industrial and residential districts simply on the basis of the differing characteristics which attract each type of development.

"Zoning decisions, it must be said, are not unalterable. Zoning maps may be changed or variances granted. But it is never certain that zoning mistakes will be corrected through these mechanisms. Whether a zoning change is made or blocked usually does not depend upon abstract considerations of eff¹ciency, but rather on the ability of interested parties to pressure the decision makers. Moreover, these escape hatches from zoning have frequently been used by unscrupulous persons to gain windfalls. See Ellickson, "Alternatives to Zoning", 40 U. of Chicago Law Rev. 681, 701-05.

5336 A.2′ 713. 6See Kleven, "Inclusionary Ordinances—Policy and Legal Issues in Requiring Developers to Build Low Cost Housing", 21 UCLA Law Rev. 1432.

‘Board of Supervisors v. DeGroff Enterprises, 198 S.E. 2" 600.

8See Lansing, Clifton and Morgan, New Homes and Poor People: A Study of Claims of Moves, Survey Research Center, Institute of Social Research, Univ of Michigan (1969). 9See The Unheavenly City, especially chapter 2.


Building One’s House

PROPERTY is the fruit of labor; property is desirable; is a positive good in the world. That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another, but let him work diligently and build one for himself, thus by example assuring that his own shall be safe from violence when built.

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